Question 1

When an economy is experiencing a "liquidity trap," monetary policy to bring the economy back to full employment
A) has too large of an effect.
B) changes wages, but prices remain unchanged.
C) changes prices but not wages.
D) no longer works.

Accepted Answer

In a liquidity trap, interest rates are already at or near zero, and the demand for money becomes relatively insensitive to changes in interest rates. This means that expansionary monetary policy, such as lowering interest rates, will not be effective in stimulating economic activity and bringing the economy back to full employment. Therefore, the correct answer is D - no longer works.

Question 2

Recall the Application about Fed Chairman Ben Bernanke's views on how to fight a liquidity trap to answer the following question(s).
-Recall the Application. Before becoming Fed Chairman, Ben Bernanke argued that the Bank of Japan should have committed to increasing inflation as a response to the Japanese liquidity trap. Doing this would allow for
A) real interest rates to be negative.
B) real interest rates to increase even if nominal rates decreased.
C) nominal interest rates to be negative.
D) both nominal and real interest rates to decrease and become negative.

Accepted Answer

Increasing inflation would lower real interest rates, potentially making them negative, by reducing the purchasing power of money. This is because the real interest rate is calculated by subtracting the inflation rate from the nominal interest rate. If inflation increases while nominal rates are low or fixed, real interest rates can become negative, encouraging spending and investment.

Question 3

The GDP for the nation of Economia is currently above potential output. If the adjustment to the long-run equilibrium occurs slowly, the government of Economia is most likely to pursue a policy of
A) increasing government spending to decrease aggregate demand.
B) decreasing the money supply to decrease aggregate demand.
C) taking no action and allowing the economy to adjust naturally.
D) decreasing government spending to increase aggregate demand.

Accepted Answer

When the GDP is above potential output, it indicates an overheated economy that could lead to inflation. To cool down the economy and decrease aggregate demand, the government or central bank might decrease the money supply, which can help bring the economy back to its long-run equilibrium. This is achieved by making borrowing more expensive and reducing spending.

Question 4

Recall the Application about Fed Chairman Ben Bernanke's views on how to fight a liquidity trap to answer the following question(s).
-The classic political business cycle would have a politician following
A) expansionary policies before an election, and contractionary policies after the election.
B) contractionary policies before an election, and expansionary policies after the election.
C) expansionary policies before and after an election.
D) contractionary policies before and after an election.

Accepted Answer

The classic political business cycle theory suggests that politicians would implement expansionary policies (such as tax cuts or increased government spending) before an election to stimulate the economy and improve their chances of reelection. After the election, they would then implement contractionary policies to counteract the inflationary effects of the pre-election expansionary policies.

Question 5

Recall the Application about the links between presidential elections and macroeconomic performance to answer the following question(s). Early theories on the links between presidential elections and macroeconomic performance focused on incumbent presidents trying to manipulate the economy in their favor to gain reelection. Subsequent research began to incorporate other factors. The first innovation was recognizing that political parties can have different goals or preferences on how to manipulate the economy. In the United States, Republicans historically have been more concerned about fighting inflation, whereas Democrats have concentrated on reducing unemployment. The second major innovation was recognizing that the public would anticipate that politicians will try to manipulate the economy before an election.
-Republicans have historically been primarily concerned with fighting inflation. Assuming this is true, then after a Republican electoral victory, the public could anticipate which of the following economic actions to fight inflation?
A) an increase in taxes and an increase in government spending
B) open market purchases and a decrease in taxes
C) open market sales and a decrease in government spending
D) a decrease in the discount rate and an increase in reserve requirements

Accepted Answer

Republicans historically favor fighting inflation through open market sales and a decrease in government spending. Therefore, the public could anticipate these economic actions after a Republican electoral victory. Option A is incorrect because an increase in government spending would lead to inflation. Option B is incorrect because open market purchases would increase the money supply and potentially lead to inflation. Option D is incorrect because a decrease in the discount rate and an increase in reserve requirements are tools used by the Federal Reserve to either stimulate or cool down the economy, not specifically fight inflation.

Question 6

If the economy was operating below full employment, it could return to full employment
A) by itself, through falling wages and prices.
B) through increases in government spending or tax cuts.
C) through open market purchases.
D) all of the above

Accepted Answer

Option A is valid, as falling wages and prices can increase the demand for goods and services, which could lead to an increase in employment. Option B is also valid, as government spending can create more job opportunities and tax cuts can increase the purchasing power of consumers, leading to an increase in demand for goods and services, and hence employment. Option C, open market purchases, can increase the money supply, which could lead to lower interest rates and an increase in investments and consumption, thus increasing employment. Therefore, all of the above options can help the economy return to full employment.

Question 7

If GDP is ________ potential output, then we expect to see ________ wages, causing the short-run aggregate supply curve to shift up.
A) above; increasing
B) above; decreasing
C) below; increasing
D) below; decreasing

Accepted Answer

If GDP is above potential output, it means that the economy is producing more than what it is capable of producing in the long-run. This situation leads to a tightening labor market, which drives up wages due to increased demand for workers. As a result, the short-run aggregate supply curve shifts up.

Question 8

Recall the Application about Fed Chairman Ben Bernanke's views on how to fight a liquidity trap to answer the following question(s).
-Recall the Application. If nominal interest rates are ________ and the inflation rate is expected to be ________, the result will be negative real interest rates.
A) close to zero; low
B) close to zero; high
C) high; close to zero
D) low; close to zero

Accepted Answer

Real interest rates are calculated by subtracting the expected inflation rate from the nominal interest rate. If nominal rates are close to zero and expected inflation is high, the real interest rate will indeed be negative.

Question 9

Recall the Application about the links between presidential elections and macroeconomic performance to answer the following question(s). Early theories on the links between presidential elections and macroeconomic performance focused on incumbent presidents trying to manipulate the economy in their favor to gain reelection. Subsequent research began to incorporate other factors. The first innovation was recognizing that political parties can have different goals or preferences on how to manipulate the economy. In the United States, Republicans historically have been more concerned about fighting inflation, whereas Democrats have concentrated on reducing unemployment. The second major innovation was recognizing that the public would anticipate that politicians will try to manipulate the economy before an election.
-If Republicans are primarily concerned with controlling inflation and Democrats are primarily concerned with controlling unemployment, then Republicans would tend to focus on ________ economic policies and Democrats would tend to focus on ________ economic policies.
A) expansionary; expansionary
B) contractionary; contractionary
C) expansionary; contractionary
D) contractionary; expansionary

Accepted Answer

Republicans, focusing on controlling inflation, would lean towards contractionary economic policies to slow down the economy and reduce inflation. Democrats, aiming to reduce unemployment, would favor expansionary economic policies to stimulate economic growth and create jobs.

Question 10

Recall the Application about the links between presidential elections and macroeconomic performance to answer the following question(s). Early theories on the links between presidential elections and macroeconomic performance focused on incumbent presidents trying to manipulate the economy in their favor to gain reelection. Subsequent research began to incorporate other factors. The first innovation was recognizing that political parties can have different goals or preferences on how to manipulate the economy. In the United States, Republicans historically have been more concerned about fighting inflation, whereas Democrats have concentrated on reducing unemployment. The second major innovation was recognizing that the public would anticipate that politicians will try to manipulate the economy before an election.
-This Application addresses the idea that politicians use monetary or fiscal policy to stimulate the economy before an election to improve their reelection prospects. This concept is known as a(n)
A) circular flow model.
B) political business cycle.
C) liquidity trap.
D) automatic stabilization policy.

Accepted Answer

The concept of politicians manipulating the economy before an election to improve their chances of reelection is known as a political business cycle. Choice A, circular flow model, refers to an economic model that shows the flow of goods and services in an economy. Choice C, liquidity trap, occurs when monetary policy is ineffective in stimulating the economy. Choice D, automatic stabilization policy, refers to the use of government spending and taxation to stabilize the economy during fluctuations.

Question 11

The GDP for the nation of Economia is currently above potential output. If the adjustment to the long-run equilibrium occurs rapidly, the government of Economia is likely to pursue a policy of
A) decreasing government spending to decrease aggregate demand.
B) decreasing the money supply to decrease aggregate demand.
C) decreasing government spending to increase aggregate demand.
D) taking no action and allowing the economy to adjust naturally.

Accepted Answer

If the adjustment to the long-run equilibrium occurs rapidly, the government is likely to take no action and allow the economy to adjust naturally, as the economy is expected to self-correct without intervention.

Question 12

The GDP for the nation of Economia is currently below potential output. If the adjustment to the long-run equilibrium occurs slowly, the government of Economia is likely to pursue a policy of
A) increasing government spending to increase aggregate demand.
B) decreasing the money supply to increase aggregate demand.
C) taking no action and allowing the economy to adjust naturally.
D) decreasing government spending to increase aggregate demand.

Accepted Answer

If the GDP for Economia is currently below potential output, it indicates a shortfall in aggregate demand. To increase aggregate demand and move towards long-run equilibrium, the government of Economia should pursue expansionary policies, such as increasing government spending. This will inject more money into the economy, creating more consumption and investment, which would eventually increase the GDP level closer to potential output.

Question 13

Keynes expressed doubts that that the economy would
A) ever return to full-employment.
B) ever move away from full-employment.
C) recover from a major recession without active policy.
D) recover from the effects of higher prices.

Accepted Answer

Keynes believed that the economy could experience prolonged periods of underemployment and that it required government intervention through active fiscal policy (such as increased government spending and tax cuts) to promote economic growth and decrease unemployment. He also argued that a laissez-faire approach to the economy would not be effective in promoting full-employment. Therefore, option C accurately reflects Keynes' views on the role of government in responding to economic downturns.

Question 14

If the unemployment rate is ________ the natural rate, then we expect to see ________ wages, causing the short-run aggregate supply curve to shift up.
A) less than; increasing
B) less than; decreasing
C) greater than; increasing
D) greater than; decreasing

Accepted Answer

When the unemployment rate is less than the natural rate, it indicates a tight labor market. This situation typically leads to increasing wages as employers compete for a limited pool of workers, which in turn can cause the short-run aggregate supply curve to shift up due to higher production costs.

Question 15

Recall the Application about Fed Chairman Ben Bernanke's views on how to fight a liquidity trap to answer the following question(s).
-According to the Application, future Fed Chairman Ben Bernanke criticized the Bank of Japan for not taking strong enough action when their interest rates fell close to zero. Bernanke argued that the Bank of Japan should have made substantial purchases of ________ and also publicly commit to ________ inflation.
A) long-term bonds; increasing
B) long-term bonds; decreasing
C) short-term bonds; increasing
D) short-term bonds; decreasing

Accepted Answer

According to the Application, Bernanke believed that the Bank of Japan should have made substantial purchases of long-term bonds and also publicly commit to increasing inflation to fight the liquidity trap.

Question 16

The GDP for the nation of Economia is currently below potential output. If the adjustment to the long-run equilibrium occurs rapidly, the government of Economia is likely to pursue a policy of
A) increasing government spending to increase aggregate demand.
B) increasing the money supply to increase aggregate demand.
C) taking no action and allowing the economy to adjust naturally.
D) decreasing government spending to increase aggregate demand.

Accepted Answer

When the adjustment to long-run equilibrium occurs rapidly, it implies that the economy is capable of self-correcting in a short period. Therefore, the government might opt for a laissez-faire approach, allowing the economy to adjust naturally without intervening through fiscal or monetary policies. This approach relies on the belief that market forces will naturally correct the output gap, bringing the economy back to its potential output.

Question 17

Recall the Application about Fed Chairman Ben Bernanke's views on how to fight a liquidity trap to answer the following question(s).
-Recall the Application. After becoming Fed Chairman, Ben Bernanke ________ a policy of purchasing long-term government bonds and ________ a policy of creating expectations of inflation in an effort to fight a liquidity trap.
A) still supported; still supported
B) still supported; no longer supported
C) no longer supported; still supported
D) no longer supported; no longer supported

Accepted Answer

After becoming Fed Chairman, Ben Bernanke still supported a policy of purchasing long-term government bonds but no longer supported a policy of creating expectations of inflation in an effort to fight a liquidity trap.

Question 18

How long do economists think it takes the U.S. economy to move from the short run to the long run?
A) two years
B) three years
C) four years
D) None of the above; economists disagree on the answer.

Accepted Answer

Economists do not agree on a specific timeline for when an economy moves from the short run to the long run, as it depends on a variety of factors such as the specific shocks or disturbances affecting the economy and the policies implemented by policymakers.

Question 19

If the economy was operating above full employment, it could return to full employment
A) by itself, through rising wages and prices.
B) through decreases in government spending or tax increases.
C) through open market sales.
D) all of the above

Accepted Answer

When an economy is operating above full employment, it can return to full employment through various mechanisms: self-adjustment via rising wages and prices, fiscal policy adjustments like decreases in government spending or tax increases, and monetary policy actions such as open market sales. These measures help cool down the economy, reducing inflationary pressures and bringing the economy back to its full employment level.

Question 20

Recall the Application about Fed Chairman Ben Bernanke's views on how to fight a liquidity trap to answer the following question(s).
-Suppose a politician stimulates the economy before an election to improve the chances she is reelected. This is known as
A) an election cycle.
B) a political business cycle.
C) lobbying.
D) campaigning.

Accepted Answer

This situation is known as a political business cycle, where politicians manipulate economic policy to benefit their electoral prospects. They may use expansionary fiscal or monetary policy to stimulate the economy and increase their chances of reelection.

Quiz 15: Modern Macroeconomics: From the Short Run to the Long Run

When an economy is experiencing a "liquidity trap," monetary policy to bring the economy back to full employment

The GDP for the nation of Economia is currently above potential output. If the adjustment to the long-run equilibrium occurs slowly, the government of Economia is most likely to pursue a policy of

Recall the Application about Fed Chairman Ben Bernanke's views on how to fight a liquidity trap to answer the following question(s) . -The classic political business cycle would have a politician following

If the economy was operating below full employment, it could return to full employment

If GDP is potential output, then we expect to see wages, causing the short-run aggregate supply curve to shift up.

Recall the Application about Fed Chairman Ben Bernanke's views on how to fight a liquidity trap to answer the following question(s) . -Recall the Application. If nominal interest rates are and the inflation rate is expected to be , the result will be negative real interest rates.

The GDP for the nation of Economia is currently above potential output. If the adjustment to the long-run equilibrium occurs rapidly, the government of Economia is likely to pursue a policy of

The GDP for the nation of Economia is currently below potential output. If the adjustment to the long-run equilibrium occurs slowly, the government of Economia is likely to pursue a policy of

Keynes expressed doubts that that the economy would

If the unemployment rate is the natural rate, then we expect to see wages, causing the short-run aggregate supply curve to shift up.

The GDP for the nation of Economia is currently below potential output. If the adjustment to the long-run equilibrium occurs rapidly, the government of Economia is likely to pursue a policy of

How long do economists think it takes the U.S. economy to move from the short run to the long run?

If the economy was operating above full employment, it could return to full employment

Recall the Application about Fed Chairman Ben Bernanke's views on how to fight a liquidity trap to answer the following question(s) . -Suppose a politician stimulates the economy before an election to improve the chances she is reelected. This is known as